from the inside, looking in

Horiemon spends his first night in a prison facility January 24, 2006

Takafumi Horie aka “Horiemon”, CEO of Livedoor, a high profile Japanese “internet company”, has been arrested along with three other senior executives of his firm last night. This move was expected since Livedoor was raided last week on suspicion of securities law violations, but the speed of the arrest has taken most people by surprise in Japan, were typical investigations are protracted bureaucratic affairs. His lieutenants are said to have begun confessions which have implicated Horie.

A week since the raid, Livedoor stock is still in freefall, with sell orders outweighing buy orders by more than one thousand to one, having already lost approximately 75% of its market value in a week.

The media has portrayed Horie as a maverick who was waging battle against the old guard and entrenched establishments of Japanese business, something that has endeared him to younger generations in particular. He famously blamed the gerontocratic business climate as the source of all of Japan’s recent ills. He promoted himself as a revolutionary, and ran as an independent candidate in last year’s general elections with the implicit approval of Prime Minister Koizumi’s LDP, with both Secretary General Takebe and then Financial Services Minister Heizo Takenaka making appearances at his side during the election campaign. The LDP are vigorously distancing themselves from Horie now, saying he was not an officially endorsed candidate.

Since the raid, the local media has reveled in covering the investigation in minute detail, including most recently live helicopter coverage of his transportation from the Prosecutor’s Office to Tokyo detention center. This is the same media who courted Horie and gave him the exposure which made him a household name by inviting him to appear on game shows as well as news programs. They are complicit in letting Horiemon hype his empire and sucking in the masses.

Whilst the establishment who had been willing to go along with Horie due to his popularity with the masses have suddenly given him the cold shoulder, Horiemon’s popularity appears undiminished with his core following.

His popular blog has attracted literally thousands of comments of support from fans and well wishers since the news of the investigation broke. Indeed, many of his supporters appear incensed at what they perceive as an establishment endorsed purge. It will be interesting to see how these supporters face up to the fact of his arrest and almost inevitable conviction. The fact that he was targeted does not make change the fact that this appears to be a person who was willing to bend or break laws to get ahead.

Some even suggest that regardless of alleged criminal practices, they still support him because of the stance he took. Where would that take us? Replacement of one corrupt establishment corpus for another corrupt group who are no less likely to entrench themselves as the last lot. That hardly seems like progress. At least most of the current establishment are founded on institutions that actually grew by delivering real value to its constituents.

People who are willing to gloss over his alleged criminal activities need to get their priorities straight. Perhaps this is another sad symptom of an increasingly amoral, money worshipping society where the masses are ignorant and yet feel they are entitled to an opinion. The media also needs to think hard about the role they played in shaping the current state of society.

The timing of the raid has raised some eyebrows, as the raid occurred on the day before a House of Representatives committee hearing relating to a construction industry scandal, which has led to rumors that it was timed to deflect attention away from this hearing which featured an individual with alleged connections to influential LDP figures. Horie may have been sacrificed by the LDP for more long term relationships.

The other factor which is likely to have affected the timing of this raid were the economic indicators which are indicating that the Japanese economy has finally emerged from a long deflationary period. It is likely that there was a decision made that the Tokyo stock market has rallied sufficiently in the last six months to suggest that investor confidence was solid enough to take the investigation of a high profile company in its stride.

Regardless of these external factors, it boils down to the fact that Livedoor and its senior executives appear to have attempted to cheat the system. If these charged are proved to be true, they should be penalised to the best of the law’s ability.

The impact of the Livedoor raid on the stock market infrastructure has been more widely reported in the international press than the raid itself. This is probably correct in light of the relative importance of the issues, compared to an Enron or a Worldcom, the scale of Livedoor’s alleged financial impropriety itself is pretty small.

In a clear case of poor planning, the TSE computer system has not been able to cope with the increasing number of trades executed on the market due in a significant part to the increasing number of individual investors taking advantage of internet brokerages which offer a daily flat fee for day traders, a trend accelerated by the recovery in the stock market. The relative health of the stock market combined with the continued vanishingly low interest rates for savings deposited in banks has tempted many personal investors to invest in the stock market. The legion of individual investors are now a significant force in the market.

Herein lies another reason the Livedoor raid had such a profound impact on the market. As a result of the large number of the recent investors who are engaged in margin trading, a panic pull-out occurred quickly spreading to the whole stock market, even though there was no change in the fundamentals supporting the market as a whole. Given the significant net presence of personal investors on the market, their combined actions are likely to have caused sufficient downward pressure which triggered automatic stop losses and created a vicious circle eventually leading to suspension of all trading on the market shaking confidence in the market. Most of the market recovered the temporary losses by the end of the week, but some internet companies were still being punished by association.

Whilst market players are entitled to expect that companies are complying with legal and reporting requirements, personal investments are a matter of personal responsibility. It is unsound investment practice to be exposed to significant risk on a company which exhibited many signs of being rather less than the sum of its parts, let alone worth anything near what its stock price suggested.

It would seem that many have forgotten the painful lessons of the bubble economy of the late 80’s and early 90’s, when so many people speculated and lost. Complicit are the media who have been promoting the stock market trading as an easy investment channel to novices who were looking to move their savings into some vehicle which would promise to bring significant returns. Media outlets from TV, newspapers and magazines targeted at all kinds of readership have been promoting internet trading in a totally irresponsible fashion of late, replete with stories of individuals who have hit the jackpot. They make it sound so easy. I’m sure the advertising revenue didn’t hurt.

Taking an overt anti-establishment stance was clearly going to make Horie and his company a target for the establishment. When taking on powerful forces, you best make sure there are no skeletons in the closet which might come back to haunt you. It probably helps if you actually also had a company which was creating real value rather than just the illusion using an elaborate scheme of mergers and acquisitions, financial engineering and marketing.

If he was the revolutionary business genius that he and others claimed he was, he would not have engaged in questionable practices which actually recall the antics of a previous generation of corrupt businesses in a way which it seems did not take long for prosecutors to dissect and unravel.

This episode should be a lesson to anyone that thinks there is an easy shortcut to making riches.

Every one of us is a member of society, and we are all obliged to act in a socially responsible fashion. What that means is that citizens and consumers should vote with their feet. Do not use the services provided by morally and ethically irresponsible organisations. Do not use the services of organisations who associate themselves with problem organisations (eg advertisers, commerical partners) until such associations are severed. It is our responsibility to purge society of those that attempt to gain advantage by illegal or unethical means, to allow true innovators and revolutionaries their rightful glory.